Chinese Economy Troubles

I believe China has reached a point where there is no way to avoid fundamental political reform. Either that, or the economy pays a price. But I don't see the reforms coming.

Can a state become so powerful in terms of military strength, police force, surveillance, and the size of the national economy, that it becomes immune to democratic reform or impulses? I don't believe that for a second.

Democracy emanates from a different dimension from all that physicality. It is only a matter of time before China opens up. Right now it does not look like the Chinese Communist Party wants to be that vehicle. And mass uprising is nowhere in the cards. So that leaves the option that the CCP is willing to say goodbye to double digit growth rates forever to keep its hold on power. The thing is, I am not sure the CCP is in grips even with that 7% growth rate. The turbulence could easily go out of hand. There's the slowing growth and the massive pollution.

My two favorite desires for China are (1) let the Dalai Lama in, and (2) beam broadband down from Elon Musk's internet satellites.

China is doing some good infrastructure work in places like Pakistan and Africa. So it's a mixed picture.

Since taking office in late November, President Xi has cracked down on dissent, locking up hundreds of free-thinkers and cementing his reputation as China’s most powerful leader in decades. Everyone from the nation’s top female lawyer to a moderate Muslim academic has been swept up. Most have been jailed on what human-rights experts consider suspect charges, either oversized crimes like subversion of state power or seemingly unconnected infractions such as disturbing traffic.

Xi’s campaign feels both brutal and brittle—a powerful ruling party spooked by a collection of unarmed poets, feminists and lawyers, few of whom are calling for an end to communist rule.

Xi may have come to power vowing to strengthen China’s commitment to rule of law but on Monday a group of high-profile foreign lawyers and heads of bar associations directly criticized the Chinese President for intimidating or detaining hundreds of Chinese lawyers, along with their staff and families......... Previously dissidents felt safe overseas but Beijing’s dragnet has expanded abroad to include both Chinese and Chinese-born foreign citizens. Panic is setting in among communities that once considered foreign soil safe ground. “I thought once I escaped China I would be safe,” says one Chinese dissident who was smuggled to Thailand last year and

is now being tailed by unknown Mandarin-speaking men as she waits in Bangkok

for a UNHCR hearing to determine whether she will be classified as a political refugee. “If I disappear tomorrow, you will have no doubt about who took me. The [Chinese] Communist Party is too powerful.” ...... That was the last sighting of the publisher of around half of the pulp political thrillers available in Hong Kong. Indeed, Mighty Media’s books are so popular that Asian airports stock them in prime display spaces, although spot checks at Chinese customs can get the books’ new owners in trouble. ....... Last week, the Swedish government summoned the Chinese and Thai ambassadors to answer questions about Gui’s disappearance from Thailand. ...

Chinese dissidents, particularly those in Thailand, are also nervous, given the recent deportation of the two Chinese activists, one of whom dabbled in caricatures of President Xi.

Mr. Lee is a British citizen whose abduction from Hong Kong would represent an “egregious breach” of China’s treaty promises concerning civil liberties in the former British colony, Britain’s Foreign Secretary Philip Hammond said this month. China’s Foreign Minister Wang Yi replied, in a preview of Mr. Gui’s confession, that Mr. Lee is “first and foremost a Chinese citizen.” ...... When reports of the missing booksellers surfaced, some speculated that rogue Chinese agents could have mounted a snatch-and-grab campaign without approval from higher-ups in Beijing. Mr. Gui’s televised confession suggests official knowledge and complicity. The cases represent an escalation of China’s assaults on journalism, the autonomy of Hong Kong and the rights of overseas Chinese who are citizens of other sovereign nations.

China’s extensive crackdown on government corruption, which has already ensnared hundreds of thousands of officials in the People’s Republic, is now spilling over the country’s borders. The State Department recently confirmed that China’s legal authorities had provided a list of 150 corrupt Chinese officials believed to be hiding in the United States, and vowed cooperation to help extradite them. That announcement came amid rumors that China’s anti-corruption czar, Wang Qishan, would visit the U.S. sometime this year, ostensibly to lead the chase overseas to catch China’s government crooks and their ill-gotten gains. ............ No one is immune, not even Communist Party leaders who once seemed untouchable. Just last Friday, Zhou Yongkang, the former security chief and retired Politburo Standing Committee member, became the highest-ranking party official to be indicted under the effort, following his arrest last December. Top military officials have come under investigation, and there are rumors a former vice president could be next. ....... State propaganda refers to the strategy as “killing tigers and swatting flies,” where the tigers are the powerful and the flies the petty officials. .......

a larger strategy to reform the very political culture of the Chinese Communist Party.

...... re-establishing the CCP’s authority over its nearly 90 million members ......... The central government can issue laws and formulate policy, but given factionalism and competition for power among officials at all levels, it has struggled to get the rank and file to implement those policies or uphold those laws. Local governments, for example, often collude with businesses to enrich themselves at the expense of the people, soliciting backlash in the form of mass protest and social unrest, and threatening the party’s power. ....... Now, with manufacturing jobs moving to Southeast Asia and growth slowing to its weakest rate in two and a half decades, Xi has publicly spoken of the need to “actively restructure the economy.” ....... Reform, however, requires the ability to enact policy. That in turn necessitates bureaucrats who follow the central government’s orders. Two common ways to deliver this kind of accountability in the modern world are through

direct democracy and an independent judiciary

. But Xi has flat-out rejected these institutional measures. ....... an apparent effort, unprecedented in the modern world, to transform the people who make up the state, rather than the structure of the state itself. He appears to be betting that transforming the moral character of officials will enable him to leave intact the institutional structure of the one-party state. But is such a feat even possible? ....... Modern-day state-building efforts in the Middle East and Africa have confirmed much of Xunzi’s thought. It is not enough to set up independent courts or to hold elections. .........

Chinese politics today exhibits a pervasive culture of patronage, factionalism, and cronyism. Or, as Xi put it in a speech in 2013, excessive bureaucratization, hedonism, and use of public funds and position for personal advancement and pleasure.

...... regulations require the official to report if he or she is to remarry or divorce, and to give reasons and justifications for the decision. ...... A 1940s rule against graft, for example, helped garner popular support for the CCP to win the civil war against the decrepit and corrupt Nationalist government; it is this rule that has been revived today to help clean up official corruption, no doubt with popular support similarly in mind. ....... Given the leadership’s apparent determination to maintain the party’s dominance, however, it is not surprising that Xi has placed the burden of reform on the officials themselves rather than the political structure they inhabit. ....... Xi may be able to avoid major institutional reforms by changing the political culture. But transforming the way government is run requires greater discussion about how government is run, and giving officials—especially lower- and mid-level officials—a greater voice. So far, Xi is only dealing with half the problem.

As for Iran, with the nuclear programme gone, and its iconic American prisoners released, normal levels of barbarity can now be resumed. ..... First, there is the ordinary repression: convicts – two-thirds of them drug dealers or drug users according to the UN – were being executed at the rate of three per day last year, the highest per-capita execution rate in the world. Then there’s the suppression of trade unions. Iran arrested 233 labour activists in the year to May 2015. All strikes and labour agitation are treated as threats to national security by the Revolutionary Guards, the hardline military force that enforces Islamic discipline at home while spearheading military operations abroad. Finally, there is the outright political repression that has left two presidential candidates from the “green” protests of 2009 – Mehdi Karroubi and Mir Hossein Mousavi – under house arrest, and hundreds of other human rights activists, lawyers, journalists and scientists detained. ....... With Bush, for eight years, we at least understood the deranged intent: destroy Saddam Hussein’s regime and let market forces rule. When market forces failed to rule, and al-Qaida filled the gap ........

Bush’s eight-year adventure in the Gulf could be described as a spectacular unravelling

...... Iranians took to the streets in 2009 in the first of the new-style networked protests. The movement that began in Tunisia in December 2010, swept Mubarak from office in Egypt a month later, set Bahrain on fire, deposed Gaddafi and provoked Assad into a murderous onslaught on his own people, was not in the US State Department’s script – no matter how many times supporters of these dictatorships claim it. ........

It was, fundamentally, the entry of the educated and networked youth into the politics of the Middle East that disoriented Obama.

...... even as you deal with dictators, and watch a shabby regional order emerge, you must support democracy and human rights everywhere – above all in Iran, whose young, educated population is still crying out for them.

The lifting of sanctions coupled with the release of up to $100bn in frozen Iranian assets as part of the nuclear agreement will reinvigorate the Iranian economy, removing a significant obstacle to growth. Nonetheless, the road to economic development remains rocky due to highly inefficient state-controlled enterprises and the lack of transparency resulting in high levels of corruption, as evidenced by Transparency International placing the country as low as 136 out of 175 countries on its Corruption Perceptions Index based on “how corrupt a country’s public sector is perceived to be”. ........ The World Bank ranks Iran at 118, way down the list, on ‘ease of doing business’. ..... The Rouhani administration is attempting to change this by pushing for robust economic reforms, seeking to pull the Iranian economy out of isolation into a global market and to attract much needed investment from abroad. He says he wants to change a situation where Iran’s exports are almost entirely hydrocarbon commodities and where it is conducting import substitution as a policy to protect state-owned and quasi-state owned enterprises. ........ The hardliners seek an Iran that is highly authoritarian under a resistance ideology closing the country to the rest of the world, and a regional posture that is more militaristic than diplomatic. ......

On the opposite side of the spectrum, the bazaaris and the moderate camp seek an Iran driven by economic liberalisation, a loosened security state that is more conducive to foreign investment, a less militaristic regional posture that is better for trade, and a non-resistance ideology that is open to globalisation.

....... he will need to take a friendlier regional posture, which would be difficult given the current rivalry with Iran’s Arab neighbour, including Saudi Arabia, and Turkey, which is seen most intensely in the conflict in Iraq and Syria ...... part of the political capital needed for economic reform is diverted to conflict and conflict-rhetoric. ...... Iran remains an authoritarian state that is disproportionately driven by hardliners. ...... economic growth will increase from 3% in 2015 to 5% in 2016. .....

Iran’s most valuable asset – its highly educated labour force ....

....... The lack of economic reform will continue to place a heavy toll on the middle class and particularly its underemployed youth. Rising expectations will have to be met and increasing oil revenue, with sanctions lifted, will be enough for the economy to grow without forcing the issue of reform. This can end up providing more incentives not to reform the economy. ....... oil in particular can enhance inequality through the ‘Dutch disease’, in which currency inflow from the sale of hydrocarbons makes other products less competitive for export, so weakening manufacturing and increasing prices for consumers.

the lessons from the economies of the crumbled Soviet Union circa 1991 or gaizhi-era China over a decade later: strengthen your legal team, treat trust like a commodity, and beware of cephalopods. ...... Since the administration of economically pragmatic President Akbar Hashemi Rafsanjani, Iranian governments have attempted to sell large portions of the mostly state-owned economy to “the real private sector.” But after trying out a range of ideological strategies and transferring large volumes of capital, over 80% of it ended up in the tentacles of organizations linked to the regime: banks, military enterprises, religious foundations, pension funds and populism-driven welfare projects ...... foreign investors will have to reckon with around 120 pseudo-private entities that by the estimates of former deputy industry minister Mohsen Safai Farahani account for half the country’s gross domestic product. .......

the underlying culture is not likely to change anytime soon. Nor is the country’s closed political structure.”

....... Most international banks are unlikely to touch Iran-based transactions as long as the sanctions on the country’s financial system remain in place, so companies like Chinese computer manufacturer Lenovo or French carmaker Renault rely on oil-for-product swaps and other types of barter. While these measures help meet the immediate needs of a consumer market starved for foreign products, the involved firms are often slated by the Iranian press for cutting disadvantageous deals that hinder the country’s long-term economic prospects. ...... Andreas Schweitzer, CEO of the Swiss-Iranian consultancy Arjan Capital, says

he employs a disproportionately large legal team to address the “special circumstances” of the Iranian business environment. “You have to look at Iran as a Chinese or Russian economy that is highly state-owned,” he says.

.... “You have to adjust a bit to the geopolitical weather,” he says. ...... To succeed in Iran, Schweitzer recommends raising capital locally and taking advantage of existing infrastructure and expertise. Ideally, the only imports should be upper management and know-how, he says. ...... “Like the Chinese, the Iranians love western brands ..... After years of isolation from international trends, Iranian workers lack the skills to fill middle and upper management positions. “If you needed in Russia 20 years ago 16 interviews to fill one job, you’re looking at double that in Iran,” Schweitzer says. .......

and the regime will silence hardline opponents of the nuclear deal by handing them the crumbs.”

Some people cannot stand good news. It troubles their fixed view of the world.

These would include Senator Marco Rubio, the Republican presidential candidate, and Prime Minister Benjamin Netanyahu of Israel, who were cast into a huff by the confirmed reversal of Iran’s nuclear program and its release of several Americans, including Jason Rezaian of The Washington Post. ............ Toughness is no more than empty aggression when it will not admit to misjudgment.

Diplomacy delivers.

..... Rezaian is coming home after a year and a half of groundless imprisonment. ...... Its advanced centrifuges have been slashed from over 1,000 to zero. Its low-enriched uranium stockpile has been cut to 660 pounds from over 19,000. ...... The plutonium route to a bomb has been cut off. Iran is subject to what President Obama called “the most comprehensive, intrusive inspection regime ever negotiated to monitor a nuclear program.” The country’s “break-out” time — the period needed to rush for a bomb — has been extended to a year from two to three months. ......

The trauma-induced Iranian-American psychosis, ongoing since the birth of the Islamic Republic in 1979, has been overcome. .... The world’s 18th-largest economy is about to rejoin the world at a time when the sinking global economy sure could use a jolt.

...... Iran is much further from a nuclear weapon because of the courageous diplomacy of Obama and Kerry and Zarif and the Iranian president, Hassan Rouhani, who all confronted hostile constituencies at home to get the deal done. ...... A big nation is open for business again, back in the global financial system and world oil market. ......

Revolutionary Guard hard-liners have not drunk the Kool-Aid at the Rouhani-Zarif school of diplomacy.

...... Iran, 37 years from its revolution, is delicately poised between hard-liners and reformers, neither of whom can dictate the country’s course, each of whom need the other for now. Imminent parliamentary elections may indicate which camp is ascendant. ......

it is hard to argue that greater contact with the world will be bad for the large, modernizing, highly educated younger generation. Iran is a pro-American country with a tired anti-American refrain. It has a successful diaspora community ready to help revive the country — if allowed to do so.

...... The breakthrough with Iran is Obama’s greatest foreign policy achievement, one that may have a transformative effect on the region. ..... That potential is what has American allies from Saudi Arabia to Israel so perturbed. They preferred the status quo. .....

The country is not “an oil-soaked rentier state,” like some of its neighbors, but a “regional power with an industrial economy”

...... Its population of 80 million is well-educated, its oil and gas reserves enormous. The country’s pent-up need for foreign investment may amount to $1 trillion. Iran, it concluded, is “preparing for takeoff.” .... Try saying the word Iran without saying the word “nuclear.” It’s time.

it watched with anxiety and irritation as Barack Obama pursued the historic agreement, complaining of the appeasement of an untrustworthy enemy at the expense of a loyal American ally. ..... the notion that Tehran controls three Arab capitals, as well as exerting subversive influence in Sunni-ruled but Shia-majority Bahrain and in Yemen, both in Saudi Arabia’s backyard. ......

“The Saudis talk about poor starving Syrians but never about poor starving Yemenis,” quipped a foreign observer. “And it’s the same, in reverse, with the Iranians.”

..... the feeling that for all their wealth the Saudis have nothing to match Iran’s highly-developed covert capabilities. ...... “[Ayatollah Ali] Khamenei traded a bomb he didn’t have for a document that gave his IRGC carte blanche in [the]region, and stripped the P5 + 1 [UN security council members and Germany] of any leverage over Iran,” said the Saudi analyst Mohammed Alyahya. ...... Jubeir, an articulate spokesman for his country, has

a clever line about Iran needing to decide whether it is a country or a cause

– a reminder that the Islamic Revolution of 1979 was indeed a watershed for the entire Middle East. In the west the perception is that Iran is becoming a post-revolutionary society seeking normality and moderation at home and abroad, despite still being ruled by a theocratic supreme leader. The Saudis flatly reject that view.

The basic problem is that China’s economic model, which involves very high saving and very low consumption, was only sustainable as long as the country could grow extremely fast, justifying high investment. This in turn was possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession. ....... rapidly rising debt, much of it owed to poorly regulated “shadow banks,” and a threat of financial meltdown. ...... the Chinese situation looks fairly grim — and new numbers have reinforced fears of a hard landing, leading not just to a plunge in Chinese stocks but to sharp declines in stock prices worldwide. ...... Yes, China is a big economy, accounting in particular for about a quarter of world manufacturing, so what happens there has implications for all of us. And China buys more than $2 trillion worth of goods and services from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. ...... while

China itself is in big trouble

, the consequences for the rest of us should be manageable. ...... Europe and the United States export to each other only a small fraction of what they produce, yet they often have recessions and recoveries at the same time. Financial linkages may be part of the story, but one also suspects that there is

psychological contagion: Good or bad news in one major economy affects animal spirits in others.

........ my best guess is still that things won’t be that bad —

nasty in China, but just a bit of turbulence elsewhere.

And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.